Chit Chat Stocks - Uber (UBER) | Not So Deep Dive

Episode Date: August 2, 2022

Uber Technologies connects consumers with independent providers of ridesharing services, restaurants, grocers, and other stores. The company operates via three different segments: Mobility, Delivery, and Freight. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Uber. Enjoy the show! Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (1:27) Industry | (14:49) Management & Ownership | (19:14) Earnings | (23:44) Balance Sheet | (28:12) Valuation | (35:26) Our Analysis | (37:02) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money, and this is our weekly show for CCM Plus subscribers only. So if you're listening to

this, that means you're subscribed. Thank you. One side note here, if you are on Apple and you want to get access to the sub stack and the google drive which is part of the subscription that we offer for free um well well for the subscription price on top is it yes sorry that's always hard to say it is included in the subscription please send us an email with the email you want us to add you on because apple does not share your emails with us and we cannot do it on our own email chit chat money podcast at gmail.com that will be in the show notes as well all right let's get right into it we have no advertisements on this episode we're talking uber uber technologies i guess is their name but we'll call uber ryan why don't you get right into it this is a storied

company and they do a lot and they have a really wide range of history yeah it's honestly a little frustrating to research companies like this because they do so much it feels hard to um discuss everything that i think is important within the hour or within the allotted time frame that we try to keep it within. And it's hard to value. We'll get to that when we try to do that. Yeah, it was really hard to value. But I'll talk about the business lines that I think are important. So they segment, they have a lot of different subsidiaries, but they segment it into three areas. So it's mobility, delivery, and freight. And so mobility, this is the original ride sharing service that Uber was built on. It's probably what most people are familiar with for

uber i guess people are familiar with uber eats at this point as well but yeah i forget what the numbers were well it was like 96 percent of americans know that uber the ride sharing and delivery is pretty high but not as high as that yeah i mean consumers pretty much anywhere in the world they're in more than 10 000 cities now uh can use the uber app to connect with a network of drivers which are independent contractors the drivers are they're not considered employees that was a whole lawsuit in california um and i think that's i guess everyone probably has their own opinion but i think that's probably for the best uh and apparently a lot of the uber drivers wanted that they wanted to be considered independent contractors but it also allows

uber to offload a lot of costs that they might have had to pay um to the drivers instead like Like if they're making improvements to their car, if they have to get a rental while they're putting their car in the shop or something like that, that's all paid for on the driver's side. It's not – Uber doesn't have to front that cost since they're independent contractors. Anyways, the way it works, consumers pay a price for each ride that varies depending on a number of factors. They have a pricing algorithm, which has also been the target of a lot of lawsuits and complaints because it can be, I don't want to say predatory, but let's say you need a ride on New Year's Eve. I think at one point they were operating in the UK and the New Year's Eve rides were seven times the normal going price because they know that people are out drinking and they know they can charge exuberant prices. But it fluctuates based on a bunch of different stuff, whether that's fuel prices, whether that is the distance for the ride, the demand at the time. They have their algorithm for determining pricing and Uber ends up taking a 25% service fee on that transaction that goes to them as a revenue.

The remainder goes to the driver. And then the segment also includes Uber's minority owned affiliates. So that includes Didi, Grab and Yandex.Taxi. So a lot of these are basically international operations where either they didn't have the expertise to operate there or they legally weren't allowed to. They decided to purchase or invest in companies that were doing similar things. And so the second segment that I'll talk about is delivery. Delivery has quickly become a pretty meaningful driver for Uber's business since the onset of the pandemic. I believe Uber Eats has tripled its revenue since the beginning of the pandemic.

This is very simple. Most people know what it is. consumers can search for restaurants, order a meal, have it delivered to their respective location by a driver that's on Uber's network. In certain locations, consumers can also order groceries, alcohol, or other convenience store goods. And with delivery, consumers pay fees to Uber and the driver, but the merchant also gives a percentage of each order to Uber depending on which pricing plan they choose. So let's say you're a restaurant, you don't get to use Uber eats for free um that i mean that adds a lot of potential volume for you as a restaurant

uh the premium pricing plan you give up 30 of each order um so it's a decent chunk and restaurants have complained about that as well but uh i mean it's it's kind of a sacrifice for higher value we'll talk about we'll probably we'll discuss later whether we think it's sustainable or not uh inserting uber and the drivers into the in a lot of these restaurant cost chance, I guess is the best way to put it. Yeah. And a lot of companies, what they do is they just basically mark up their price on Uber Eats to kind of alleviate or keep some level of profitability on those orders.

And then the last segment is freight. So Uber Spray Offering tries to leverage or it says it leverages its core network and connection platform to help shippers find carriers. So let's say you're a medium-sized business, you need to ship some cargo across the country or maybe state to state, something like that. You can go on Uber's freight offering and connect to different carriers. So the compelling part for the carrier side is demand curation. So a lot of carriers will have what they call deadhead miles where they're in between shipments and they're not carrying any cargo.

This allows them to plug in, hopefully find some local shipments that are needed that are on their close to their desired route. And they can just basically get more demand from that. And then from the shipping side, it's pretty obvious, uh, you know, you can ship your goods and connect to a platform of carriers to do that. The other one, um, the other important part of this last year, they acquired trans place, which was literally basically what Uber freight wanted to be. Yeah, a little bit. It's more, they go more into the like analytics side. So it's kind of, you would use both, I think a bit as well, but they also do the managed services. So it's like trying to expand them a bit down and up into basically everything that you would need for analytics and software, if you're a shipper or a carrier. And that costs $2.25 billion in cash. They were able to get a lot of that cash from investors to front some of that. But that's basically become a big staple of their freight off right now. And it's bolted on a lot of revenue. So if you saw a big jump up in revenue, some of that is probably inorganic. inorganic. That's the basics of the overall business. The two biggest components are delivery and mobility. They're obviously still investing in freight, but it's a smaller percentage of the business. And then as far as history goes, I think Uber has probably the most

iconic Silicon Valley founding story in recent history that I think they pretty much, if they didn't pioneer, they embody the move fast and break things approach. And it's been controversial throughout pretty much ever since the beginning um but to kind of give some context for anyone who hasn't heard of their founding story i also recommend going and reading the book it's super pumped right yeah we'll make sure yeah let's put that in the reference link to reference again that is what you get uh as a part of the written stuff to go along with the show uh all the sources we had for the episode and anything we think for further reading we'll put there so we'll put that book down there. Yeah. The company was founded in 2008, kind of 2009 timeframe by two friends,

Travis Kalanick and Garrett Camp. The two of them had prior success in tech as well. So I believe Travis Kalanick sold his company for $19 million and Garrett Camp sold it for 75 million to eBay. And Garrett Camp was still working as CEO of the company under eBay, whereas Kalanick basically just left and after they sold their companies they were at a tech conference in paris which i feel like all good ideas start at tech conferences yes yeah um and they could not get a cab that night so they had this wonderful epiphany to basically be able to request rides from your phone i heard another founding story that someone tried they tried to it cost like 800 bucks or something for them not even this night and they were like this needs to be solved

with the mobile phone yeah either way it's basically the two of them kind of came up with this idea together they kind of sat on it while they came back to san francisco but garrett camp was pretty enamored with the idea maybe more so than kalanick at the start and so he bought the domain name ubercab.com and basically got kalanick to join in on the idea by naming him chief incubator um oh boy and i from stories that i've read uh he was literally like basically just used his house in san francisco to like uh bring developers in and kind of let him work for uber in that house they had a lot of yeah they had a lot of that in that book yeah basically if you've watched the show silicon valley this is kind of what the character erlich bachman is based upon i

think probably something similar or yeah and a mix of other characters yeah yeah and uh anyway in 2010 they officially launched in san francisco they also named travis kalanick the ceo at that time as well um and it was basically it was a black car service or they almost at the start they wanted it to be an on-demand limo service so it was kind of for higher end customers more people that could could afford a higher priced ride and then they quickly rolled out uber x which was more affordable uh but the idea took off pretty quickly and i think san francisco was probably the perfect place to launch at the time i think a lot of people were like willing to experiment with new technology in that area and so uber took off gained a lot of steam

earned earth dot tons of venture capital money and i mean tons maybe more so other than stripe I can't think of another company that's gotten more. Maybe WeWork. Oh, yeah. WeWork got that $4 billion crazy thing from SoftBank. But Uber got, didn't they get an $8 billion? It's not really relevant today, but. They may have.

Well, in 2015, so five years after their founding, six years, they cut a valuation round or they were valued at $51 billion after a funding round that included the Saudi Sovereign Wealth Fund. So, yeah, they attracted money from pretty much every investor. I think Bezos at one point even invested. The list goes on of people that became. There was plenty of notable investors that were involved in sort of their funding rounds. And then with that money came a lot of reckless behavior. So they were pretty known for throwing wild parties. One point they brought Beyonce on for a corporate event and they paid her, I believe it was $6 million worth of restricted stock units to perform.

And this is when they rented out a Vegas hotel too, I believe for like the 10X ride parties. It was like the 10 millionth ride or maybe a billionth ride. I can't remember. Yeah, they were known for wild parties. And they also were ordered to stop service in several of their markets by regulators, which they basically refused and kept going. So that was kind of the move fast, break things approach. um and you can you could say that uber had its reasons to do that um but and anyway they they didn't really it felt to them it seemed like that they were above the law at this point um and i think a lot of that had to do with the reputation they'd gained and a lot of the momentum they were probably feeling from their community in san francisco and selling rides for

four bucks so everyone wanted them yeah and they there were the the part that kind of sucks is there were tons of scandals that went along with it so the culture the workplace culture was essentially several accusations of sexist and hostile workplace environments um at one point there was like a 3 000 word blog post from someone at the company that sparked an investigation that essentially said 20 executives they're not executives 20 staff members need to leave there needs to be all these different changes in place kalanick resigned after a video went viral of him like basically getting in an argument with an uber driver yeah at least he was in an uber but yeah the there was something uh he was out yeah shareholders pretty much asked him to leave

at that point and so they hired um dara two months later coast for shahi coast for shahi thank you So two months later, they hired our host, Khos Roshahi, and he had been the CFO at IEC for several years and the CEO of Expedia Group. Sounds like they did not have a hard time finding a new CEO. Fast forward two more years to 2019, they go public, made a name for themselves by being the largest single day loss in dollar terms of any IPO in history. So not a great IPO. Um, but they did still raise a ton of money and I, I I'm blanking on the valuation there, but that was 2019. They've since come down a pretty significant amount.

Um, and I'll, I'll get to that, but why don't you hit industry and landscape? Yeah. Industry. It's interesting. We'll talk industry and competition. They outlined in their recent investor day, their total addressable markets. And when you're listening to this, you might laugh, but that's how they think of their business in gross bookings.

So you really have to just look at these and kind of divide by, I don't know, divide by 10 or something like that for the total market and revenue that they're actually going after. And in reality, a lot of these are exaggerated. But first up in mobility, I think there's a $5 trillion total addressable market. And this is defined as all passenger vehicle and transportation trips in 175 countries. Again, do with this what you will. their likely actual addressable market is probably closer to maybe a trillion dollars or 500 billion dollars but again if they get everyone to give up car ownership who knows maybe they'll hit that five trillion dollar mark and eliminate all public transportation or get all public transportation

on uber either way delivery they also estimate at five trillion dollars and that is defined as global spend on retail restaurants and grocery delivery which is one of their big growth drivers they're trying to do to compete with instacart and doordash and others um again they're only going to take a small take rate of this so they're never going to have five trillion dollars in revenue from this but the the serviceable addressable market or the actual addressable market is probably closer to maybe 500 billion dollars uh globally for the markets they're trying to serve uh in a gross bookings perspective and then revenue will be a lot less and then freight, again, it sounds like a broken record, but they say $4 trillion here, and that is defined

as the global logistics cost. So unless they actually start doing everything in the value chain for logistics, which we can say is a 0% chance of happening, they're not actually going after $4 trillion. That is the gross bookings target, I guess. And in reality, it's probably a lot lower. But either way, I think the big takeaway is they have huge vision for the total amount of dollars flowing through their platform and all three of their markets are quite large if they can convince consumers to adopt these um ride sharing food delivery grocery delivery and for the free um basically having mobile first not going going away from pen and paper all that good stuff now if we look at competitors as many people probably know there are a ton in mobility there's

Lyft in the United States, Ola in India. I saw a rumor that today, so it was kind of interesting for the show that Uber was rumored to be thinking of buying out Ola or doing a deal with them, which is not surprising given they do deals so much. There's Didi, which is the Chinese one that they had a big deal with to swap shares, I think. They're in Asia, Australia, and Latin America. There is Gojek in Southeast Asia. There is Grab in Southeast Asia and many other smaller ones. In delivery, there's DoorDash in the US, there's Instacart in the US, there's Grubhub in the US, there's Deliveroo and other Just Eat takeaway companies in Europe. And then there's Rappi, which is a big one in Latin America. And then with freight, I know there's a ton of

information for this year, but it's because they're trying to do so much. There is CH Robinson, there's Total Quality, there's XBO Logistics. These are the three big legacy, I guess you would describe them um marketplaces or carriers or whoever that they describe in the 10k under their risk factors uh another thing they're competing with in freight is really the status quo of small pen and paper companies they say there are about i think it was it's over 10 000 but i believe the number was 17 000 of these companies within the connecting and you know connecting shippers and carriers or doing shipping and all that stuff so there's a lot of fragmentation here that they're trying to connect and you can see where they're trying to go after it um there's also a lot of

smaller startups in the freight software space not really any of that broken through but and uber is definitely the leader but there is amazon would be a part of that too i guess yeah exactly but that's more vertically integrated they don't do anything with really anyone else at least at the moment um and with software yeah there's a lot of bc dollars flowing into the space just something to note. People have kind of seen how successful Uber Freight has been, and they're trying to go after that same sort of market. All right, let's hit management, ownership, and compensation. As Ryan mentioned, the CEO is Dara Khosrowshahi. I'll just call him Dara from here on out. He was brought in after the Kalanick scandals. Yeah, Ryan already mentioned

all the rest of that there. CFO, Chief Financial Officer is Nelson Chai, C-H-A-I. He was brought in again at around the same time in 2018 looks to be kind of a mercenary to help steer the company towards a public offering and just being more professional because define what you mean as mercenary for anyone oh mercenary is just an outsider that has experience and is just coming in to professionalize it and do a job you know mercenary uh he has experience in the finance and insurance markets so not a big technology background you can kind of see why they wanted to go that route, given the scandals going on at the time. And he still stayed at the company until this day. There are a total of 10 executive officers, according to the company's IR page.

Not that important, but I think it's kind of interesting to note that they have 10 total. They have a chief legal, which is very important for them. They have a chief people officer. Now, if we look at the board of directors, their compensation was $3.4 million in 2021. And I'm adding these new metrics here, because when we talk about compensation, I want to reference it to how much money the company is actually generating. So if we look at board compensation, it was only 0.055% of last year's 2021. Yeah, half of a 0.1 of a percent. So really, really negligible of their 2021 contribution profit,

which is just gross profit minus operations and support. So I wanted to put that in because of Warby Parker, when we just did them, We talked about how egregious board compensation was for them, for a company of that size, but we didn't put any numbers to it. I want to do that now. Now, lastly, let's go to executive compensation. It is based on these three different factors. One, 20% of the performance-restricted stock units for the executive team is based on diversity, equity, and inclusion goals. Second, annual cash bonuses are based on 20% for gross bookings growth, 40% for adjusted EBITDA, and then the rest on some kind of strange metrics that are

hard to parse out for this podcast. Generally, most of the compensation is either based on revenue slash bookings growth, adjusted EBITDA, or diversity inclusion, or excuse me, equity and inclusion goals. Total executive compensation was $52.8 million in 2021, or 0.85% of 2021 contribution profit. Now, if we look at the shareholder table that we have here, pretty basic. A lot of the VCs and CalNIC have all sold out. So we have Morgan Stanley as a 5% owner. But besides that, no 5% owners. Dara owns 0.096% of the company. I have an error there. Let me correct it quick. Yeah, 0.096% of the company. And then an associate with the Saudi Arabia Wealth Fund owns, okay, well, he's listed there, but it's the Saudi fund that owns it. They own 3.73%

of the company. I think that is important to note. And they've invested several times throughout Uber's history. They were one of the financiers of the recent TransPlace acquisition. Yeah. And I don't know if it's that important, but just the influence of the Saudi fund is something to note. Maybe to keep in the back of your mind, make sure they're not trying to do anything because we know they can be feisty i guess is a good word um a little bit unpredictable the saudi fund if we go to the last note i have here and i think this is kind of the big takeaway or yeah i think the biggest takeaway here for compensation is that the board and executive compensation are based on suspect metrics we don't like you know compensation based on revenue

growth i don't like it based on adjusted ebitda uh basing compensation on diversity equity and Inclusion seems a bit misaligned because you can have those goals, but I don't think you should be, you know, it shouldn't be part of your salary. But the size of the compensation for these executives is not that egregious relative to the size of the company and how much contribution profit. I know we can't talk about actual cash flow because they're unprofitable, but how much kind of gross profit they're generating. All right, Ryan, do you want to hit earnings? Yeah, I will. I will say that relative to some of the other companies we've looked at recently and kind of relative to my own expectations going in, executive compensation and board compensation was not nearly as bad as I thought it'd be. Just the metrics.

That's the only real beef I found. Right. As for earnings over the last 12 months, they've done $21.4 billion in revenue. That was up basically double from the 12 months prior. However, they are lapping some of the COVID effects, which there was volume and rides decreased substantially during those periods. I don't know if anyone ever tried to get an Uber during those periods, but it was somewhat difficult and a lot of people were reluctant to do it. Mask mandates and a lot of drivers, both drivers and consumers were reluctant. And then they had 36% gross margins during that period and roughly negative $2 billion in EBITDA, which was basically minus 9% EBITDA margin.

However, it's been a gradual improvement out of COVID in terms of both, well, both on the revenue standpoint and profitability, although there isn't necessarily any true profits to write home about yet. It has certainly been trending in the right direction. So in the most recent quarter, they had $26.4 billion in gross bookings. Brett talked about why that's an important metric for the company. That was up 35% year over year. So still pretty strong, pretty solid growth. $6.9 billion in revenue, up 136%. They increased the price of their rides on average by a pretty fat margin.

And- Did they say the percentage or is that just- Well, that's just me guessing because revenue outpaced trips. Gotcha. By a lot. And part of that is because of the fuel costs associated with it. But also, I imagine just overall cost increases as well. But the revenue composition for the quarter, 37% came from mobility, 37% from delivery, and now 26% from freight that was previously much lower. But it's since come up a bit thanks to that Transplay's acquisition. They had 115 million monthly active platform customers. that grew 17 i don't know why they don't just say customers their metrics are insane yeah the 115 million customers grew 17 on the year 15 million dollars in operating cash flow they know there is operating cash flow um however they had about 360 million dollars

in stock-based compensation so on a per share basis i mean i guess cash flow is better than no cash flow but uh it's negligible um and they do report some adjusted ebita numbers that exclude so they give you segment adjusted ebita um which does not include their corporate general and administrative expenses research and development which really is a part of each segment because the r&d is focused on those segments they're dangerous they're dangerous uh metrics to look at yeah if you look at it on a purely let's say you cut gna and r&d to the bone per segment each one is adjusted even a positive but the only one that i would say is really like seems like it's generating actual potential cash would be the mobility business their adjusted ebitda number

as a percentage of revenue was 25%. So I think that business is getting to maturity and getting to the point where I think it can generate positive margins for the company. We'll include this chart in the show notes that we send out on the sub stack, but I did a chart of other expenses, which is the one that Ryan's talking about,

the stuff that they don't include for freight delivery or mobility costs. And this historically included autonomous vehicles, but they divested that into a separate company called Aurora. So as a percentage of gross brookings in 2018, it was 5.4%. In 2019, it was 4.9%. In 2020, it was 4.5%.

And in 2021, due to that divestiture and the right sizing of costs, it was only 2.1%. So those other expenses, that stuff that they're not including, is actually getting much smaller as a percentage of gross brookings. So it's trending in the right direction. However, yes, it is dangerous to just look at those segment adjusted EBITDA numbers. Now, I'm going to dive into the balance sheet and liquidity, but I feel like we've been throwing a lot of numbers at listeners, which is kind of difficult to digest in this format. So I'll try to basically just summarize it. Their balance sheet is a little tricky, not only because they have added debt in recent years, but there's an insurance arm to their business.

And so it's a little difficult to know what cash needs to be, what their cash requirements are for some of those elements. But I'll go through the assets. They have about $4 billion in unrestricted cash and cash equivalents. That's true cash. They have $6.2 billion worth of investments. Last year, that was $11.8 billion. So it's been more than halved. And that value is comprised of equity and debt securities in a bunch of privately held companies. We've talked about all the investments and different share swaps that they do with international companies. That's a part of this. And given that a lot of that value comes from Uber's own judgment and discretion, it seems like they're being relatively transparent since they've marked it down by 50% over the last year. Yeah. And some of these are public. Again, it's not really relevant to the show, but some of them are public.

I believe, well, Didi's a mess, but I don't know if that's ever going to be worth anything. but that that might be public grab is public um but some of them are private if you're including these in your valuation i would be very conservative on the investment side i would take maybe half of their investment value but what does that mean about the value of uber's own business that's because they're basically copycats but i guess that's a whole another question yeah well it's just given the risk of some of these business models um and then they have $624 million worth of equity method investments. I believe that is attributable to their share of income or losses from Yandex.taxi, which is another one of their

international investments. And that's Russia. So gosh, it's so confusing with all this. So they have Russia and China exposure, which is just tough with those investments. Yeah, I think they're pretty much have exposure nearly everywhere in the globe. And then they have $3.4 billion of restricted cash held as collateral for insurance policy. So that's kind of the asset side, and I'll try to summarize it towards the end. But then on the liability side, they have just over $9 billion in total debt. Almost all of it, well, all of it is long-term. All the debt is due between 2025 and 2030, and most of the debt comes in the form of

senior notes. There is a little bit that's convertible and they've refinanced some that are new a little earlier, but the rates vary widely and they're pretty much all fixed rate, at least on the senior notes. Some of the highest interest rate is 8.1%, lowest interest rate, not the refinanced ones, is 4.7%. Not crazy, but that's a big amount of debt relative to not only the cash that they have on hand, but the theoretical cash that they can generate. So there is a lot of cash flow that's going to be going to these debt holders over the next – I think the last – they really start paying it back in 2025, 2026, and beyond, up to 2030. A lot of the cash they generate over that time is going to go to those debt holders. And there's a high interest expense. Right.

And the four point, which is important because they report EBITDA, which is earnings before interest, taxes, depreciation, and amortization. Interest is a big expense for them. I think they did about $500 million in interest expense last year. I assume it'll probably go up this year. So I would include that. And then the only other big ass or liabilities, their insurance reserves, $4.1 billion there. They use, I'm definitely not used to reading an insurance balance sheet. I'm by no means great at assessing insurance companies.

You will not see us covering insurance on this show. You'll have to go elsewhere. Yeah, but Uber uses a combination of third-party insurers and its own in-house insurance subsidiary to provide auto insurance on behalf of its drivers. So that's basically what you have to know. The only thing they really cover is crashes for their drivers. Um, and sometimes it's not even them covering, sometimes it's those third parties. Um, but a lot of the drivers also have, um, ride sharing insurance provided by their actual insurer.

Uh, a lot of insurance companies, auto insurers have began including that, um, not all of them, but some of them. And so there is, it just complicates the balance sheet because it's a meaningful part. However, they are able to diversify it across a ton of drivers. I don't think it's not catastrophe insurance. Fairly predictable. Yeah, you're getting a little more predictability there. And then to kind of sum it up, let's assume Uber did a billion dollars in EBITDA this year.

I think some of the estimates had them doing just over a billion, according to S&P Global. for reference they did 420 million in adjusted EBITDA over the first two quarters of the year and it's starting to ramp up a bit well sorry they will if they meet their guidance for the second quarter I think they're about to report if they did that they'd have a 9.3 times debt to EBITDA ratio depending how that grows that's a lot of debt and their EBITDA is very unpredictable Like their true cash that they're generating enough to pay off debt, it's hard to see because they don't really tell you transparently. And their EBITDA figure is kind of smoke and mirrors. So know that debt is a big part of this equation.

They'll be able to liquidate investments if need be. But again, that's just not ideal. And they want to be able to invest in growth for a lot of these segments. So it just could put them in a pinch if they're not generating cash. Yeah. If you're reading the newsletter, I say they've got $11 billion. That's the number I came out to in cash-esque value, because a lot of the investments, let's say they're debt securities, you might not be able to find a buyer. Or even the equity securities, let's say you started selling, you probably have such a large percentage of those businesses internationally that you're going to decrease your own value. And is Deity worth anything? Yeah, it's a very important question because maybe you should just X out all investments when you're doing valuation. That would be – we'll see.

And they also have an investment in Lime, which is clearly at zero. Did they not divest that? Oh, they might have divested that. It's so confusing, but they may have divested that. Yeah. Anyway, tricky balance sheet, lots of debt, certainly a part of the equation here. Yeah, you can really come up with a lot of your own enterprise values here, which moves into valuation. I have the dynamic valuation linked there for anyone reading the newsletter.

Market cap, $45 billion, ticker UBER, just their name, enterprise value. And I'm just taking everything at face value there from the latest 10Q is about $43.6 billion. Now, the metrics I'm using here, because they don't generate cash, I'm going to be using contribution profit, which is my own definition of taking gross profit minus operation and support costs because operation and support costs are going to scale with revenue most likely. So I'm doing an EV to contribution profit just ratio, and that is seven. So fairly decent, not too bad. And then I'm going to do an EV to free cashflow, assuming they convert 3% of their gross bookings to free cashflow. They do not right now, like we've mentioned, but this is around what

management's long-term goal is. So I kind of want to, at today's price, at what the cash that management says they're going to generate, their EV to free cash flow would be about 16. So not crazy either, but again, it makes sense that they have this discount because they haven't proven that they've been able to generate this cash. But lastly, potentially dilutive securities outstanding, which are stock options, RSUs, blah, blah, blah, all that stuff are about 100 million at the end of 2021, or around 5% of total shares outstanding at the time. They're pretty heavy on SBC, not terrible anymore, but I would expect, and it's hard, there's always a range here, maybe 2% to 3% dilution going forward.

And that's just part of your valuation framework. All right. Anecdotal evidence. Let's get to the fun stuff. Yeah, I was going to say, too many numbers. Ryan, what do you think? I mean, everyone has an opinion on Uber, but... I like Uber service.

Um, I use it whenever I have to, let's say I'm going out to bars or, uh, might be drinking. That's the easiest. Yeah. If, if, yeah, the replacing the DD is the designated driver is just, that's the easiest product for them. It's, it's a cost that I'm more than, I mean, the prices have certainly gone up recently, so it's been a lot more, I'm very reluctant to do a lot of Ubering by myself since you to front that cost you usually want to split that between multiple people yeah um i wonder

i i do try to i i typically price compare between uber and lyft i have them in the same little folder in my phone same yeah and they're typically very similar prices so if they're just very similar prices i'll go with uber but most of the drivers that i know drive both uber and lyft and they've got both little tags on their cars so uh i guess maybe i have a little more trust for uber um but i've never had like a horrible experience at the we had a lift that was a bad experience at the berkshire meeting it just kept driving by us but that's not lift's fault yeah that's part of the whole process i will say i this is kind of more theory but as the uber prices have gone up i mean it feels like they've gone to maybe double what they were last year typical uber

price that's kind of just anecdotal um my excitement to maybe go out or maybe my encouragement to stay home has kind of like i kind of feel more encouraged to go home so vcs have been subsidizing your partying huh i wonder if there's an inverse correlation between the price of ubers and demand for drinks yeah that's a good point when i mean when they were five bucks it was you know it's basically free if you're splitting splitting stuff i don't know why i say five bucks it was probably 20 bucks for a long one and you split that between multiple people it's not that much money it's like half a drink um yeah i don't know all right my anecdotal evidence i rarely use them just airport and uh designated driver stuff really uber is a better product in my mind though

i don't know why i think this but i do uh that's probably why they have higher market share um also anecdotally they talk about convincing people to give up car ownership as being one of their long-term goals and how they can service that gigantic mobility, Tam, I think the path to convincing people to do that has just a ton of hurdles that is going to make it extremely, extremely unlikely. I don't like the prices of their rides. That's one hurdle. It's way more costly to just drive Uber everywhere.

Yeah. I mean, it's not when they run the studies, it's not that much more, but you're giving up the freedom of having the car ownership. I mean, the key thing is you can't do a long car ride. it's just way more difficult you're giving up that i mean it's not that much more expensive if you're just going around a city yeah but i guess obviously depends what car you're on too but yeah all right future growth opportunities ryan i think and this is more yeah you have an activist future growth opportunity dispose of international investments and downsize i know

that's probably the lamest growth opportunity i could think of but it's the most practical way for them to get to a reasonable level of profitability. You tweeted this out and I saw it in their 10K, but they have 29,300 employees. I know. I'm going to put a chart in of their employee count in the sub stack. I know we mentioned that at the time, but just want to throw that out there because it is part of the stuff.

Yeah. I'm sorry if this sounds inconsiderate, but there's no way they need that much. For reference, I think some comparable companies, you could say size-wise, square, shopify spotify i'd say they're all similar in terms of what i think would be employee needs and the the size of their market caps and maybe revenue bases they all have less than 10 000 shopify i think has like right around 10 000 but they're laying off 10 of their workforce

square and spotify around five and six thousand i think square is a little our spotify is a little higher now but there's no reason that uber maybe i'm wrong but i don't think they need roughly 30 000 employees um and then on top of that they definitely don't need all these pointless international investments you don't have to have exposure everywhere in the globe exactly yeah who cares if someone wins china and you don't and you're not a part of it exactly yeah i totally agree uh and it makes sense yeah i don't know what the employees are doing frankly i don't know what a lot of employees are doing in a lot of companies and i say that i don't want people to lose their jobs but as an investor that's the hat you have to wear and okay and i know they just invested a

whole bunch of money into freight but and maybe they maybe transplace kind of changes the economics of that but i don't think freight is a necessary vertical for them to have either oh hot take i think i disagree i think it's pretty promising but it is speculative a bit i mean they got a decent amount of bookings under management you know they have a lot of large companies all from trans place well no i mean let me look at i have something in my notes here a little quote from the investor day um blah blah blah where is it okay we now serve more than 100 of the fortune 500 shippers five out of the top five beverage companies and nine out of the top 10 cpg companies okay but not exclusively sure sure like they're probably getting one or two of those

deadhead miles or getting the deadhead routes but maybe spin off uber freight i don't know and if they're just subsidizing costs like they did early on just to me you have potentially proven economics with your mobility and delivery i don't know if you need freight well there at least wait until you are generating enough cash to to invest in something like let's not get too aggressive here if they just stopped uber freight that would be destroying a lot of shareholder value but i maybe this would be increasing cash flow it would it would i think definitively destroy a lot of shareholder value why do you say that because they've invested a lot of money into it okay yeah and they have a lot of bookings under management they put in all that work

if you just destroy it you know that's that's just making matters worse what if it's just hemorrhaging cash it's not it's it's uh well yeah they're they're okay look the 2021 freight adjusted even to margin was only negative six percent again that's not a great number but that is excluding a ton sure of probably real cost it's the only one that isn't real adjust it's the only one that isn't adjusted even uh like truly positive sure yeah but i mean they're on the right path we'll see we'll see we'll see what it looks like two to three years all right what's growth opportunity mine is advertising this is the favorite part or my favorite part of this business um they believe they can hit 1 billion dollars in this segment by 2024 and it should

have way higher margins and less operating hiccups these are including in-car advertisements uh promotions on uber eats and promotions on uber eats from restaurants are definitely the biggest one here at least right now and then other stuff they're working on like just in-app stuff um you got 100 million plus monthly active users there's potential here the food one makes a ton a sense uh the segment is quite small right now they don't break it out but i think they're doing like 200 to 300 million in revenue this year but if scaled it could really give them operating flexibility and i think a price advantages versus competitors because if lyft doesn't have advertisements and then uber can offer a slightly lower price and still make a profit that could be

a huge advantage for them all right highlights and lowlights right uh highlights for me is the brand notoriety i think uber is essentially a verb at this point and we talked about it for some reason when it comes to uber and lyft we just choose uber assuming price parity uh it's pretty much a duopoly at least in my local market between those two um and so there is something to be said for the actual brand the other thing i they they've shown an ability to raise prices without decreasing the number of trips number of trips is up 17 percent year-over-year this quarter and prices uh certainly grew as well um so testament i guess to the pricing power how much higher can that go i don't know first yeah it's a big conundrum for them do they focus

on trying to get as many people to adopt the platform as possible or do they go for the most popular basically rich people that can afford it if it's expensive yeah and then low lights for me I think management's capital allocation decisions and the lack of focus have been very frustrating to watch. Wouldn't even mention Drizzly and Corner Shop. Yeah. Anyway, they've acquired and divested so many businesses, it's actually really hard to keep track of. And then it also feels like they're way over-employed. I already mentioned that.

I don't see also why they need to spend 32% of their gross profit on sales and marketing. why you you're a brand that everyone knows the i mean i would assume the biggest bulk of that they're afraid they're afraid to stop i think the bulk of that sales and marketing spend is probably discounts to uber eats fair customers i'd agree which leads to my next low light i think delivery is super competitive i think it's kind of commoditized and you have to reacquire customers constantly because if DoorDash gives me a $20 coupon, and I've literally gotten this from Uber Eats, I got a $25 coupon just for no reason to just come back on. They send it to the email constantly or the notification. Like, yeah, I'll do it, but I'm not going to order it

constantly. I'll just order when you keep giving me coupons and I'll go to the next platform if they do the same. We also have seen the Grubhub thing with Amazon, which anecdotally, I talked about this on the Power Hour. I don't know if anyone listening to this listens to both, but I thought it was a good idea from Amazon, but I didn't use Grubhub. I think it's been like a month now, maybe a few weeks. So I was like,

all right, I'm just going to cancel it. Even though they're giving me huge discounts on food delivery, it just doesn't. Again, I'm in agreement with you here. Food delivery is just not as good of a business at all. No,

I agree. I mean, you can make the case that freight could be a good business and you kind of made that, but really it's mobility here is the only one I think is like, well, it's a small model. Yeah,

exactly. Yeah. That was about what I was going to say. All right. My highlights. I have a lot of low lights. I wanted to write them all down, but I don't know if I'm going to talk about all of them. I'll go through them quickly. Highlights. I think there's a clear network effect on the mobility side. Delivery. We just talked about that with freight. Tons of promise, but early days. Dara seems to have a solid head on his shoulders, although they've been loose with the capital allocation uh but he had a super tall task you know right sizing the business after the 20 from the 2017-2018 period where they were just doing crazy things and then you had the wrench with

covid19 they came out alive and that you know that's something i like dara yeah maybe that should have been a highlight i think he's a decent ceo yeah well at least i got to mention it here um they've made another one of my highlights is they've made consistent progress on cash burn over the last few years coming from the divestitures and employee costs. Still a long way to go here because they aren't consistently generating cash. I like the advertising product. We talked about that and Uber One, which is their subscription for $10 a month to kind of give you a comprehensive, I don't want to say prime-like, but just discounts across stuff, less fees. That feels like a good way to reduce churn across their customer base. However, I'm not

sure how important it can be relative to their market size. And then last highlight is the legal and regulatory barriers to entry should give them a little bit of an insulation, a little bit of a competitive advantage now for anyone that's trying to start up. Low lights, I have a lot. I don't know if I'm going to say all of them here. Big ones, though, they are exposed to energy costs, fuel, and they are exposed to labor inflation from their drivers. I guess an example I have here is the higher the minimum wage in an Amazon warehouse in an area, the higher the hurdle it is to join Uber and start earning money. Second low light, and this kind of ties into that, the turnover from drivers has been abysmally high. They don't give up the numbers, but a lot of

third-party data says almost all of them quit after a year. So you're constantly turning over, you're constantly having to acquire drivers. I didn't really realize that before researching the business. That is a huge cost that might not be scalable. We talked about adjusted EBITDA. We talked about incentives. Let me give one number here. In the risk factors on their 10K, they said they had $2.4 billion in promotions in 2021 or 38% of contribution profit. The big question is, what happens if that goes away? Does growth stop? Are those costs going to go away eventually? They made poor capital allocation decisions. Ryan talked about that. I have a small one here of the risk of eventually having to pay app store fees. They're excluded from that right

now but if any regulation comes down the line where all apps basically with payments or people transacting on stuff have to pay um you know apple or google a five to ten percent cut the you know not just games and dating apps and stuff like that that could you know really hurt them it's a low probability of happening but if it does it would really devastate the business um okay here's the last one. A lot of the low-hanging fruit, I believe, has been eaten, but taken, I just wanted to keep the analogy, within mobility and delivery. For example, in 2021, 23% of mobility bookings came from their five biggest cities, which are Chicago, Miami, New York City, London, and Sao Paulo. Thinking about those markets, they are likely much more profitable because of the density

compared to a city of, say, 250,000 people in the Great Plains or the South or anywhere else in the world i have trouble equating this with the company's goal of expanding its margins if your growth is coming from these areas where is the margin expansion going to come from is it all going to be pricing power in these core cities or what i mean yeah i think there's probably limited growth in terms of i don't know how much users will grow i don't think it'll be like some insane clip or customers but i mean do they have to enter those rural markets well here's the thing they're in say chicago let's use chicago as an example is there anyone in that city that doesn't know uber exists and wouldn't use it and if they're not lowering prices okay how are you

going to attract more demand and if you're not attracting more demand maybe you can raise prices to increase bookings, sure, but... I don't know if you need to track more demand. Okay, but then where's the growth coming from? They're outlining 20% bookings growth. I'm saying I don't know if they need to grow. I think they need to grow their margins. Maybe not the top line.

Well, I mean, that's not what they're going to try to do. So, that's my low light for expanding into new, increasing gross bookings. I'm not sure where growth comes from. Maybe all that growth they're factoring is from price increases or delivery plus freight. They can grow, but whether it's profitable or not, I think the smaller the city, the worse it's going to be.

The thing is, they're running up against, they can't keep doing this because they have debt they're going to owe. That's true. Yeah. I mean, they'll be able to refinance it if need be, but at what interest rate? Will they or will the sovereign wealth fund? I don't know. Like every time it seems that they need money, they go to them. So that is a, not as a small risk.

You don't love to be associated with the Saudis financially. Just, yeah, I think they're kind of running out of time to figure out the profitability. I think, and they've talked about, Oh, 2023, 2023, it's got, you know, it's got, we're going to be just even a profitable, but the whole year. Yeah. For the whole year. But you can only fake profitability for so long, especially when you have a levered balance sheet.

Yeah, let me, I missed, I don't think I said this here, but they have 16 adjustments and they're adjusted EBITDA. I don't know where I put that. Yeah. So 16, I think that's a record. Let's go bull case. What do you have? So my bull case is through advertising and the subscription service,

they are able to maintain as the low cost provider for both supply and demand, which is drivers and riders and then delivery drivers and customers that can insulate themselves from any competition in their core markets while also achieving the free cash flow margins approaching 3% to 5% as percentage of gross bookings. This is the theory. However, after researching them, I think the key here is rationalizing the mobility market in the ways we've discussed, fully embracing advertising with Uber Eats. I kind of think that is the silver bullet here. If delivery isn't that good, they run it at cost and the advertising can be. It just seems like that can be very profitable because you could have someone like Starbucks

throwing a ton of money at them and then continuing to go for rapid growth at freight, or like we discussed, maybe spending it out. This could equate to, I think, solid long-term returns for shareholders at current prices at seven times contribution profit or 16 times theoretical free cash flow there. Yeah, I don't know. That's kind of the numbers i was throwing around you need to see that free cash flow margin inch up whether it's as a percentage of revenue or percentage of gross bookings get an inch higher yeah let's uh my bold case is that uber hyper focuses on mobility and delivery and you know maybe freight is has the potential you talked about but this simplifies the valuation work for me so i'm going to say

they hyper focus on mobility and delivery they mentioned in their investor day that they think they could reach 7% adjusted EBITDA margin between those two businesses. As a percentage of gross bookings, or sorry, you were about to say that. Yeah. Sorry. As a percentage of gross bookings. So combined delivery and mobility did about just under a hundred billion dollars in gross bookings this year over the last 12 months. And I think it was 18 billion in revenue. So that would be, let's round $7 million in adjusted EBITDA profits or just earnings that i hate calling it it's adjusted ebita let's just say um seven billion dollars assuming no growth sounds like they could grow those i assume there's some natural

growth that'll still happen from here yeah that's fair at 10 times adjusted ebita you'd get 70 billion dollar market cap that's okay returns yeah we got to remember though that some of the corporate cars costs aren't included there so like that difference between true cash generation that seven percent margin might be steeper it might be steep it might be down to three percent yeah and the other thing is let's assume that all the sales and marketing which they if i'm not mistaken back out uh i can't confirm that but i didn't we can just talk about that generally as you know further income statement there's just so many adjustments it makes it really really tough to value i i don't know i'd like to see here's the thing if we wait until

a full year of true cash flow is it too late yeah it's such a popular stock that everyone's already betting on that happening everyone already thinks that they're going to generate this cash and it's almost like it's priced like it already will i think that's getting into our more or less interested but let's hit bear case pretty simple for me the unit economics just don't work they don't end up working and uber and really none of these other businesses in these industries have proven they can consistently generate positive cash flow for shareholders if they haven't now what are they at 100 billion plus run rate on gross bookings if they haven't at this scale when will they um combine this with steady share dilution and uber looks like a prime candidate to

uh what i like to call or what i've been thinking about is quote running on a treadmill for eternity they're working really hard they seem to be excreting a lot of effort but they're going nowhere that's kind of how i think about it that's kind of my bear case as well the this trade sideways for five to ten years um all right you're talking about the debt yeah i forgot it you forgot about that like let's say they're okay the bear case for me is that they generate not enough cash flow or a negligible amount of cash flow and it all ends up going to debt holders over the next five to seven years. And it feels like this is one of those where it's profitability, like true, let's say 5% for cashflow margins. Sustainable is just this

perpetual what if, like, oh, what if they're able to get to blah, blah, blah margin? They just never do. Yeah. But who knows? Maybe the margins will be even higher than we think. If they can right size costs even further, they get more rational there. Maybe the stock will do quite well. but again they say they're going to do that it's kind of a watch what i watch what i do and i'll watch what i say what they actually do is continue to just burn money yeah more or less interested less i'm less interested i mean it's not by saying they work way too hard they have to convince everyone their drivers in their um supply and demand to come back to their platform they have to work really hard why would you go invest in that compared to airbnb where the

supply and demand just comes to them it's just why would you ever invest in uber over airbnb i just i know if uber was trading at like a really discounted price at a certain price anything good investment but i just don't understand because the marketplace doesn't seem nearly as high quality yeah i don't know maybe maybe i don't know it seems like a lot of people drive as sort of interim jobs sure um so but onboarding cause i mean there's probably some attraction or some sort of natural adoption from drivers but no i'm less interested also um investing doesn't need to be this hard and i i we like to have some sort of idea what kind of cash a company can generate and i'm clueless when it comes to uber like yeah and they they don't get

they don't do a very good job of being transparent either they had 190 investor slides uh but i couldn't come away with anything concrete on that investor day it just it's super comp it's a very complicated thesis, and it's too hard for me. Yeah, alright. That sums up me as well. Stop for next week. It is my turn. We're going to play a little game for the next three times that it's my choice. I'm going to weigh out the

three that I want. I'm going to choose, but you can decide which ones we do, or what order. Alright. Here are the three companies. Yeti, Capcom, Warner Music Group. Oof. Let's go

just pick the one for next week and then love the other two let's go yeti yeti okay we're talking shoulders i've got i've got a music related one in mind so we should pair those up to go like right after one another all right beautiful uh that's gonna do it make sure oh we don't even have to say it if let's just remind you if you're listening on apple podcast as a ccm plus subscriber send us your email chit chat money podcast at gmail.com um that will be in the show notes as well we really want you to have access to the sub stack if you truly don't want that that's okay you don't have to send us an email but we think it's a really you know it's a good part of the product i mean it's a value add and there's no reason i guess not to have it yeah exactly and

we think the conjunction of the newsletter plus um what you're listening to right now can be great you know the combination is just being able to look at something is probably especially with all the numbers we talked about today i think having the charts uh will help kind of digest the information. Correct. The combination. All right. That's going to do it. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Don't think it'll be Uber, but who knows? We never know. You never know. All right. Thank you for listening. Thank you for subscribing, being some of the first subscribers on CCM+.

We'll see you next time. Thank you.